|Bid||0.00 x 0|
|Ask||0.00 x 0|
|Day's Range||112.10 - 112.48|
|52 Week Range||111.04 - 115.26|
|PE Ratio (TTM)||N/A|
|Expense Ratio (net)||0.20%|
Gold prices (IAU) have been on a losing spree since mid-April due to the US dollar’s strength and diverging monetary policies in the United States (IVV) and the rest of the world. During the congressional testimony, Fed Chair Jerome Powell gave an upbeat assessment of the US (VOO) economy. The assets are attractive when interest rates (TLT) are high because gold doesn’t generate any income.
In the preceding parts of this series, we discussed how gold prices have remained weaker despite escalating trade war fears and geopolitical tensions. Many of these risks stem from the ongoing trade spats, which would create inflationary (TIP) pressures in the economy apart from uncertainty. Gold (GLD) is often seen as an inflation hedge.
It’s a question that has nagged at investors for as long as both asset categories have existed … are stocks the way to go, or bonds? If both, how much of either belong in a portfolio?
Oil prices (USO) soared ~6.0% in the week ended June 22. After its meeting on June 22, OPEC decided to raise its output. However, this increase was lower than what the markets expected.
An inverted yield curve, in which short-term yields (SHY) are higher than long-term yields (TLT), is considered as a warning sign for a future recession. The LEI’s economic model uses the yield spread between the ten-year Treasury bond (IEF) and the federal funds rate (TBF) as one of the components. The May LEI report indicated that this yield spread increased from ~1.2 in April to ~1.3 in May. The use of the term “symmetric” along with the inflation target in the May FOMC meeting minutes led to the increase of yield spreads in May.
The average weekly unemployment claim numbers are used as one of the forward indicators in the Conference Board LEI (Leading Economic Index). Low unemployment levels can indicate that the economy is performing at an optimal level. Recent reports indicate that unemployment levels in the US are moving toward multidecade lows.
Is It Time to Turn Bullish on Gold after Its Recent Weakness? The Consumer Price Inflation (or CPI) for May rose 2.8% annually, its fastest annual pace in more than six years. The PCE (personal consumption expenditure) (CPI), the Fed’s preferred gauge of inflation, has also hit the 2.0% level.
An auction of $5 billion of 30-year Treasury-inflation protected securities, or TIPs, Thursday saw a record share taken down by indirect bidders, a proxy for foreign investors. The auction also "stopped" at 1.1 basis points at 0.934%, a sign the bond sale drew strong demand. The TIP exchange-traded fund (tip) is up by 0.7% for the month.
The US Bureau of Labor Statistics releases a monthly report that tracks price trends in wholesale markets. The PPI (producer price index) is constructed using the inputs of a monthly survey of industries in the manufacturing sector (XLI). The survey consists of questions that determine changes in raw materials prices, production levels, and finished goods.
With inflation on the rise, investors may consider ETF themes that may help diminish the negative effects and diversify an investment portfolio. The consumer price index was up 0.2% from the previous month and 2.8% year-over-year, its biggest annual gain since February 2012. The data “provide further evidence that inflation is moving towards the Fed’s objective,” and the central bank will continue on its gradual rate-hike path, Kevin Cummins, an economist at NatWest Markets, told Bloomberg.
With the unemployment rate at a low 3.8%, rising wages and a healthy inflation level, the markets are poised for another rate hike by the Federal Reserve. The federal funds rate is currently in the range of 1.5% to 1.75%, but an increase of a quarter of a percentage point is expected, but not guaranteed. On Wednesday, the Federal Reserve will release the most recent economic forecasts, which could hint at additional hikes.
This week is set to be packed with action as the Fed and the ECB (European Central Bank) are scheduled to hold crucial policy meetings. While a quarter-percent rate hike is largely expected, many will be watching for changes in the Fed’s tone on policy, economic growth, and inflation (TIP), and how many rate hikes the Fed is planning for this year. A more aggressive approach to rate hikes by the Fed could be negative for precious metals, including gold.
With interest rates on the rise, bond values, REITs and dividend-paying stocks have all been pressured lower as a means of adjusting for the prevailing interest rates of the day. It’s one reason why Treasury Inflation-Protected Securities, or TIPS for short is worth a look. Another reason is that, with the inflation outlook being largely uncertain there’s no end in sight to the frustration.
The Bureau of Economic Analysis (or BEA) released its second estimate for real GDP for the first quarter on May 30. Although the reading was lower than consensus expectations, the reason for the decline was due to a decline in inventories, which could be considered a positive sign.
If there was any lingering doubt about the matter, it’s been wiped away within the past few weeks — inflation is upon us, and it’s here to stay. Expectations of three, if not four, rate hikes before the end of the year plainly says higher prices must be reined in before rampant inflation sparks an economic meltdown.
The last three trading sessions in May are likely to be influenced by geopolitical issues rather than economic data. Last week (ended May 25), traders’ sudden realization that the supply decline because of sanctions on Iran and disturbances in Venezuela could be offset by increased production from Russia and OPEC (Organization of the Petroleum Exporting Countries) countries led to a sharp fall in the energy sector (XLE). This decline could continue if the negative outlook for crude prices persists this week.
The 3% ten-year bond yield isn’t a significant level for any reason—it’s a psychological level that has created some market frenzy. The continued increase in bond yields, however, has been worrying stakeholders in the housing (XHB) industry. Recent reports from the housing sector haven’t raised any red flags for the sector at this point, but continued increases in the 30-year mortgage rate along with rising home prices could push prospective buyers away once rates reach higher levels.
The FOMC’s May meeting minutes indicated that some of its members had turned bearish on inflation (TIP). This information played a major role in changing investor’s assessment of the Fed’s plan for future rate hikes. If members feel that inflation can’t sustain above 2%, there’s the chance that they could limit the number of rate hikes going forward.
The most recent FOMC meeting was on May 1–2. The decision to leave the rate unchanged had been expected by the markets, but the FOMC used the meeting to announce a likely rate hike in June. FOMC meeting minutes are usually released three weeks after an FOMC meeting.
The US Federal Reserve considers the state of the employment market and the level of inflation (TIP) when making monetary policy decisions. Unemployment in the US is at a multi-decade low, leading to a shortage of skilled labor and forcing employers to increase wages to attract employees. The Conference Board Leading Economic Index (or LEI) uses average weekly initial claims as a constituent in its economic model rather than the popular non-farm payrolls because weekly claims, when adjusted for seasonality, provide a more accurate account of underlying economic conditions.
The US bond markets remained under selling pressure as bond yields, especially at the short end of the curve, continued to shoot up, while the long-term yields remained subdued. The US Fed through its May post-meeting statement said that inflation would reach the 2% target soon, which was interpreted as a signal for a faster pace of rate hikes. An inverted yield curve, where short-term (SHY) yields are higher than long-term yields (TLT) is considered a warning sign for future recessions, and thus the yield spread has a place in the leading economic index.
While there are some factors that could support gold, such as rising oil prices (USO), the opposing factors seem much stronger. The rise in oil prices is seen as positive for gold since it drives inflation and increases gold’s appeal as an inflation hedge.
As per the latest Bank of America Merrill Lynch (or BofAML) Global Fund Manager survey released on May 15, growth expectations have slipped to the lowest level in the last two years. The report indicated that global fund managers expect a slowdown in global growth with only 1% of the respondents thinking that the global economy would strengthen in the next 12 months. Only 2% of respondents were expecting a recession in 2018, while most of the respondents expect the next recession by the first quarter of 2020.
The US dollar depreciated against its major trading-partner currencies after the Bureau of Labor Statistics reported on May 10 that US consumer prices grew 0.1% in April after falling 0.1% in March. The core consumer price index, which excludes volatile food and energy prices, rose 0.2%, marking a 2.1% year-over-year increase. The US dollar (UUP) fell after this report, as a slower rate of inflation (TIP) growth could mean a slower pace of rate hikes. In a developed economy, higher interest rates boost the currency. On May 10, the US dollar (USDU) index closed at 92.5. It appreciated by 0. ...